The cheapest emergency loan for you!

A top-up loan could come to your rescue in an emergency. Here's why...

Before we touch the subject that how a top-up loan could offer you a life line in times of distress let’s understand what is a top-up loan. As the name explains a top-up loan is given over and above an already existing loan.

Top-up loan explained

Top-up is a loan that is given by the bank to an existing borrower who already has taken a home loan from the bank. These loans are not given for a particular purpose and can be used by the borrower as per her/his needs. These loans are available to the home loan borrowers after a few years of the original loan. This allows the lender to assess the repayment behaviour of the borrower and then decide accordingly if they want to lend further to him/her. This is also due to the fact that after repaying the loan for a few years the liability of the borrowers decreases and thus s/he can use the margin to borrow if he/she so requires.

A top-up loan could be used to repay existing expensive loans, for medical emergencies, education purpose, renovating or decorating a house, for marriage of a loved one and so on.

Why are top-up loans useful in emergencies

So what makes top-up loans so useful in emergencies? Here are a few aspects that make these loans an option worth considering if you need funds for an unforeseen event.

Advantages over other methods of borrowing

Usually personal loans are the preferred choice when one is looking for funds for miscellaneous purposes. Interest for top-up loans is usually 1.5 per cent to 2 per cent more than home loans but if you still compare it to that rate at which personal loans are available, top-up loans are less expensive. Loan against property (LAP)  is also more expensive than a top-up loan.

Personal loans are available for 5 to 7 years; gold loans for 1 to 3 years and loan against deposits will depend on the remaining tenure of the investment, while a top-up loan could be availed for 15 years to 20 years depending on the remaining home loan tenure.

A longer loan period lowers the EMI burden for the borrower. If you compare it to loan against securities then you realise borrowing against securities is unpredictable as the value of securities may change as per market conditions.

Quicker and easier processing

Emergencies arrive unannounced. Quick and easy access to funds is paramount when dealing with an emergency; if the processing takes too long then the purpose of borrowing may be defeated. Again since the person is already dealing with a stressful condition s/he may not be very happy to deal with cumbersome documentation process and frequent visits to the lender.

Since the applicant seeking the top-up loan already has a relationship with the lender (existing home loan), the processing will be fast, easy and hassle free. The most important factor here for assessing the applicant would be the home loan repayment record and the loan application would be accepted or rejected based on that.

Can be used for any purpose

Another feature that makes top-up loans useful during emergencies is their versatility in use. You are not given the loan for a specific purpose thus their use is not restricted. So without specifying the reason or worrying whether the loan is available for a particular purpose or not you could seek a top-up loan. So these loans could help you in a medical emergency, help a loved one get married or fund education when education loan is not available or sufficient.

Top-up loans though useful must be taken after due diligence. So if you have a home loan make sure that you service it well, you pay all your EMIs on time as this existing loan could offer you a lifeline in an emergency. Not treating your existing debt responsibly as always ruins your chance of getting further credit.

Illustration: Uttam Ghosh/Rediff.com

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.